Viability Study Queens Head, 34 Lawn Lane, Hemel Hempstead - HP3 9HL - Adam Bullas MRICS, Savills (UK) Limited - Planning Alerts | UK
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Cordage 30 Limited February 2021
Viability Study
Queens Head, 34 Lawn Lane, Hemel Hempstead
HP3 9HL
Adam Bullas MRICS, Savills (UK) Limited
Contents
1.0 Instructions ...........................................................................................................................................................1
2.0 Executive Summary ..............................................................................................................................................1
3.0 My Professional Background ................................................................................................................................1
4.0 Information Relied Upon .......................................................................................................................................1
5.0 Inspection .............................................................................................................................................................1
6.0 Location ................................................................................................................................................................1
7.0 Description ............................................................................................................................................................2
8.0 Business Overview ...............................................................................................................................................3
9.0 Historic Trade .......................................................................................................................................................4
10.0 The Pub Market ....................................................................................................................................................5
11.0 Factors Affecting the Pub Market ........................................................................................................................ 10
12.0 Public House Tenanted Occupational Market ..................................................................................................... 15
13.0 Covid-19 Impact .................................................................................................................................................. 18
14.0 Comment on internal and external layout ........................................................................................................... 19
15.0 Condition............................................................................................................................................................. 19
16.0 My Opinion of Trade ........................................................................................................................................... 20
17.0 Alternative Provision ........................................................................................................................................... 22
18.0 Conclusion .......................................................................................................................................................... 25
Appendices 26
Appendix 1 Photographs ...............................................................................................................................................................27
Appendix 2 Covid-19 Market Update ............................................................................................................................................29
Appendix 3 BCIS Conversion/Rehabilitation Costs .......................................................................................................................38
Appendix 4 Letter from Tenant......................................................................................................................................................40
Appendix 5 Accounting Information .............................................................................................................................................42
Property: The Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 0
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 1
1.0 Instructions I have been instructed by Cordage 30 Limited “Cordage”, to inspect the Property and to assess its viability as a going concern as a public house. 2.0 Executive Summary For reasons that will become clear, I am of the opinion that the Property is not a viable business in both the short term and long term following refurbishment. The current situation with Covid-19 makes the outlook for the business to be even worse. 3.0 My Professional Background The report has been independently compiled by me, Adam Bullas of Savills (UK) Ltd. I am a Director and Chartered Surveyor specialising in the licensed trade for over 15 years. I have frequently advised on the future viability of pub businesses and, where investment is planned by the owner or operator, the feasibility of such schemes. 4.0 Information Relied Upon To the extent that you have provided us with information and / or instructed us to obtain it from a third party you agree, unless it is otherwise agreed by us in writing, that we can safely rely upon the accuracy, completeness and consistency of this information without further verification. 5.0 Inspection The Property was inspected internally and externally by my colleague James Grasby on 22 October 2020 and by myself on 7 December 2020. The weather on both occasions was dry but overcast during the inspections. 6.0 Location The Queens Head is located towards the south of Hemel Hempstead, 10 kilometres (6 miles) west of St Albans, 16 kilometres (10 miles) north of Watford and 31 kilometres (19 miles) east of Aylesbury. The Property is situated immediately south of The Plough Roundabout, which links the A41 to the west with the M1 to the east, and occupies a roadside position fronting Lawn Lane. The immediate area surrounding the Property is a mix of retail, leisure, industrial and residential uses. A location plan and street plan are shown below. Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 1
Location Plan
An Ordnance Survey plan is shown below outlining my understanding of the boundaries of the site edged red.
OS Plan
7.0 Description
The Property comprises a detached two storey building with brick elevations beneath a pitched and hipped roof set on a site area
extending to 0.11 acres (0.04 hectares).
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 2
Internally, the ground floor comprises an open bar trading area with central bar servery. To the front is the primary trading area
with seating provided over loose tables, chairs and benches. To the rear is a further trade area with seating provided on bar stools.
To the right are the gentlemen’s toilets and to the left are the ladies toilets. The basement is accessed from behind the bar servery
and provides a beer cellar and stores. Access to the uppers was unavailable on the date of inspection, however we understand
that they comprise a mezzanine first floor and an upper first floor. We will however refer to the layout as first and second floor
throughout the remainder of the report as per the plans which were provided to us. We understand from the tenant that the first
and second floors comprise of five double bedrooms, a bathroom, a kitchen, an office and a separate toilet.
Externally to the front is a trade garden providing seating on loose tables and benches for approximately 36 covers. To the rear
is a small trade garden providing seating on benches for 15 covers. There is no customer parking available at the Property,
although to the side and rear there is a small drive to accommodate two vehicles for a licensee.
We detail a breakdown of the Gross Internal Area in accordance with our measurements below:-
· Ground Floor: 205.7 sq m 2,214 sq ft
· First Floor: 47.6 sq m 512 sq ft
· Second Floor: 78.7 sq m 847 sq ft
Total 332 sq m 3,573 sq ft
Photographs of the Property are included at Appendix 1.
8.0 Business Overview
The Queens Head was until very recently (October 2020) operated in a tenanted format under a tied tenancy. Under a tied tenancy
a tenant operates a property under a lease agreement and is required to purchase some, or all, of the sold products and services
from a particular Brewery or Pub Company at a margin. Under tied agreements, rents are below the Market Rent reflective of the
income receivable by the Landlord under the agreement.
We understand the tenant operated the Property under a fully tied lease agreement and therefore all products, including beer,
wine and soft drinks and machine income are purchased from the freeholder, Punch, at a margin. We understand the current
lease commenced on 7 Nov 2017 for a term of 5 years at a rent £12,500pa.
The Queens Head can be described as a traditional ‘wet’ led pub with a small single bar pub operation and no commercial kitchen
facilities. As a result the trade remains entirely ‘wet-led’. The Property ceased trading in October 2020 due to significant law and
order issues originating from a local encampment, and the Property will now remain closed, notwithstanding the current National
Lockdown imposed by the UK Government on 5 January 2021 in light of the Covid-19 pandemic.
The Queens Head, although fronting a busy main road, is situated south of the primary retail areas and main late night circuit with
surrounding uses predominantly industrial, retail and business. Reflective of this location we would anticipate little trade is
generated from footfall. However, we do consider that ‘locals’ trade may be present as there is considerable residential provision
to the east of the subject Property.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 3
Public Houses such as the Queens Head have suffered more than others since the economic downturn of 2008 due to them not
having the economies of scale to compete with the larger managed house operations. The Property does not have a trade kitchen
and only a small trade area of 1,396 sq ft. It would not attract ‘destination’ customers and it is clear that the pub has had to rely
on the local population which has not supported the business sufficiently recently. There are better located venues with superior
facilities within close proximity as set out in section 17.
More specifically to the Queens Head, the local encampment has deterred most locals from using the pub. The most recent
landlord banned a number of individuals from the local encampment following significant disruption to the pub’s trade, and damage
to it. This subsequently resulted in a number of windows being broken, and paint being thrown over the front door, as well as
substantial threats against the tenant and her staff. These matters have been documented extensively with the local police.
However, these events initial resulted with door staff being employed at an extra cost and more recently have resulted in the pub’s
tenant handing in her notice, as well as putting off other prospective tenants. We enclose at Appendix 4 a copy of a letter that
has been provided to us reiterating the above.
Cordage has subsequently exchanged contracts to purchase the Property from its previous owners Punch in December 2020.
9.0 Historic Trade
We should make it clear that a leased and tenanted model is where the pubs are operated by tenants, who run their own business
and are under no obligation to share their accounts with the pub company/Landlord. Whilst the pub companies would not generally
been privy to accounting information, they would have derived a rent and barrelage income which they would have figures for.
We have been provided barrelage information that has been summarised below:-
Source: Punch Taverns
As can be seen above, with the exception of 2018, the barrelage at the public house has been declining year on year, with a
significant drop in trade in 2020 but please note this is because the pub only had the ability to trade until March 2020 in light of
Covid restrictions.
In addition to barrelage information, the tenant, KJE Pubs Ltd, has provided their accounts for a full operational year (Nov 18 to
Oct 19) to highlight the ongoing poor trade at the pub. For that particular year the pub was only able to generate a negligible net
profit of £7,316 and that is even before any door staff were employed. We enclose these accounts at Appendix 5.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 4
In light of the above, it would take a leap of faith from an operator to reposition the offering of the property to create and incorporate a viable food service. The business relied only on wet sales, a part of the market that is declining across the country and the industry. Even before Covid19 restrictions, customers are increasingly staying at home to drink but going out to eat and the resulting level of decline is not unusual for this type of operation. Businesses such as the one run at The Queens Head have been unable to compete in the current market due to the lack of a food offering and declining wet sales resulting in the business as loss-making. These factors are considered essential for a business to be able to compete satisfactorily. The trade at the public house therefore ‘paints a very clear picture’ in that the business has been struggling for some time and with no ability to serve food and declining wet trade. We understand the tenant was no longer in a position to trade the pub profitably. I would therefore consider the business, disregarding the impact of Covid-19, to be unviable on the basis of a tied tenanted operating format. In consideration that the business is unviable in a tied tenanted model I have therefore reviewed the option of operating the business in a free-of-tie tenanted model both in the short term and the long term. 10.0 The Pub Market The pub sector has, over the past decade, been the focus of negative press with the regularly reported annual decline in UK pub numbers. The start of the 2020 however brought a new found positivity with the Office of National Statistics (ONS) reporting an overall increase in UK pub and bar numbers between 2018 and 2019 of 315 bringing the total to 39,130 (0.8% increase). Small pubs, previously the highlight of reported decline, reflective of the long term trend towards people spending more of their household income on eating out and less drinking out, have bounced back with those pubs and bars employing fewer than 10 employees increasing by 85 in 2019 (0.4% increase). Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 5
Number of Pubs and Bars by Size, UK, 2001 to 2019
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Number of public houses and bars 25 or more employees
Number of public houses and bars 10 to 24 employees
Number of public houses and bars Fewer than 10 employees
Source: ONS
Despite the number of pubs having declined by 22% since 2008, the sector has continued to perform well with the total turnover
of pubs having reduced in real terms by only 6% and the number of people employed by pubs having increased 8%. We note the
table below reflects the most up to date data for Total Turnover including VAT.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 6
Number of Pubs Vs Turnover in the UK
55,000 27,000
Total turnover inc VAT, deflated to 2017 value with CPI, £m
50,000 25,000
Number of Pubs and Bars, UK, 2008 to 2017
45,000 23,000
40,000 21,000
35,000 19,000
30,000 17,000
25,000 15,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Number of Pubs and Bars, UK, 2008 to 2017 Total turnover inc VAT, deflated to 2017 value with CPI, £m
Source: ONS
The strength of the pub market prior to Covid was reflected in the recent acquisitions of two of the biggest pub companies in the
UK. TDR Capital, the private equity firm that owns Stonegate Pub Co, acquired Ei Group in a deal which was agreed in September
2019 and completed March 2020 and valued the group at an enterprise value of £2.97bn. Ei Group owns approximately 4,400
pubs across Great Britain with a mix of managed and tenanted properties. The purchase reflects a multiplier of EBITDA of 11.40x
and equates to a price per pub of circa £720,000. In addition, CK Asset Holdings Ltd , the Hong Kong based real estate investor,
acquired Greene King Plc in August 2019 for a reported price of £4.6bn. Greene King holds a mix of managed and tenanted
properties totalling approximately 2,700 pubs, restaurants and hotels.
The pub market is primarily divided into three groups: managed, tenanted and freehouses. We have provided below detail on the
managed house and tenanted pub markets below. Freehouses are smaller privately owned pubs, with the owners having full
control over the operation and profitability.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 78.1. Managed Pubs
Managed houses are generally larger pubs with the operator deriving income from profit generated from the retail operation. The
main operators are:
Number of
Operator LFL Sales
Units
+2.9%
Greene King c.1750
52 wks to 28 April 2019
+3.5%
Mitchells & Butlers c.1,700
52 wks to 28 September 2019
+0.8%
Marston’s Premium and Destination c.1,200
52 wks to 28 September 19
+5.3%
J D Wetherspoon c.900
12 wks to 19 January 2020
+1.2%
Stonegate 772
53 wks to 29 September 2019
+5%
Ei Group 419
52 wks to 30 September 2019
+1.1%
Young’s 200
26 wks to 30 October 2019
+2.5%
Fuller’s 204
42 wks to 18 January 2020
Prior to Covid the managed pub sector was reporting good like for like trading results against the food and beverage sector as a
whole, which illustrates the strength of the trading performance of pubs. The Coffer Peach Tracker (CPT) provides an overview
of the performance of the UK F&B market with sales figures collected from 58 restaurants and primarily food led pub operators.
The CPT reported, in January 2020, like for like sales for pubs were up 1.7% on 2019 with total sales up 5.4%. The restaurant
market was also showing positive results with total sales in January 2020 up 3.2% with like for like sales also up 2.5%. Restaurants
have shown the biggest increases reflective of strong sales outside of London.
The most recent reporting from the seven largest managed pub operators: Greene King, J D Wetherspoons, Marston’s, Mitchell’s
and Butlers, Ei Group, Fuller’s, and Young’s indicates a like for like trading average of 2.4%. This compares positively to the 12
month rolling average of 1.24% for the Coffer Peach Tracker as a whole cohort. The chart below shows that pub operators, some
of whom are represented in the CPT, are performing well against the market as a whole.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 8LFL Managed Pub Sales vs Coffer Peach Tracker av LTM
7.00%
Company LFL Data
Coffer Peach av last 12 months %
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Marstons
Youngs
Oakman Inns
Mitchells &
Fuller Smith &
Mitchells &
JW Lees
Stonegate
City Pub Group
Wetherspoon
Shepherd
Ei Group
Neame
Butlers
Butlers
Turner
JD
8.2 Tenanted Pubs
Tenanted pubs are owned by pub companies who let the property, generally on a tied basis. The pub company derives income
from rent, the profit made from selling drink to the tenant, who under the terms of his agreement is required to buy from the
landlord, and a share of the machine profit. The main pub companies are:
Operator Number of Units LFL Net Income
+1.2%
Ei Group 3,555
52 wks to 30 September 2019
Star Pubs & Bars c.2,900 N/A
Punch Taverns c.1,300 N/A
+1.6%
Greene King 1,110
52 wks to 28 April 2019
Wellington Pub Company c.850 N/A
Admiral Taverns c.950 N/A
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 9Operator Number of Units LFL Net Income
+4.9%
New River REIT 671
Q3 of FY2020
Davidson Kempner 370 N/A
+2%
Marston’s 365
52 wks to 28 September 2019
11.0 Factors Affecting the Pub Market
9.1 Consumer Confidence
Consumers are willing to spend in pubs but the post-recession consumer has become far more discerning. Eating out has become
ingrained into our behaviour with around three-quarters of adults over the age of 18 now eating out on a regular basis and their
habits have not been materially changed by the recession. Whilst the frequency of eating out declined slightly in 2018, the amount
that customers spend per head has risen. Barclaycard reported that the 12 month moving average consumer spending in Pubs
from January 2020 was up 10.10% compared with 15.00% for the 12 months to January 2019. The 12 month moving average
from January 2020 for total consumer spending grew by 3.90%, demonstrating the rising spending patterns in pubs.. Consumers
are still searching out deals but are also focused on quality and therefore professional operators offering customers what they
want at the right price are trading well. The chart below illustrates how household spending on leisure continues to grow at a faster
rate than general retail spending which is encouraging for the sector.
UK Household Spending
Retail Goods Leisure services
25.0%
20.0%
YoY change (Current prices)
15.0%
10.0%
5.0%
0.0%
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
-5.0%
-10.0%
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 10Source: Oxford Economics
Although slightly historic, the pie chart below shows the proportion of household income spent on food and alcoholic drinks
between 2017 and 2018 indicating the dominance of the eating out market.
Spend on restaurant, café, pub and bar meals, and alcohol, as a
percentage of total household spend, UK, 2017-2018
Alcoholic drinks (away from home) Alcoholic drinks (brought home) Restaurant, café, pub and bar meals
Source: ONS
Pubs are taking an increasing share of the eating out market with many operators capitalising on the growth of this sector. This
growth is well illustrated by the proportion of food sales by the largest operators set out below. 2018 saw a retreat from this as
operators transitioned back to a more traditional wet led sales model.
Operator Food as % of Total Sales
Mitchells & Butlers 51%
Greene King 40%
Marston’s Managed 60%
J D Wetherspoon 35%
Fuller, Smith & Turner 30%
Young & Co.’s 28%
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 119.2 Staff Costs Staff costs have risen with the introduction of the National Living Wage (NLW) starting at £7.50 for over 25s from April 2017, and increased to £8.21 in April 2019, an increase of 4.9% handing a full-time worker a further £690 annual pay increase. NLW increased to £8.72 in April 2020, an increase of 6.2%. On 11 March 2020 the Government announced the Spring Budget, proposing NLW to reach £10.50 an hour by 2024, provided economic conditions allow. The Budget comes in backdrop of global outbreak of Covid-19 and sets out a plan to support businesses that may be affected. Those business with fewer than 250 employees, for up to 14 days, will be refunded sick pay by the Government. Businesses will also have access to a new temporary coronavirus interruption loan scheme of up to £2m. 9.3 Taxation In 2019 the Government committed to introducing more frequent business rates revaluations, moving to three yearly revaluations instead of the current five yearly cycle, and brought forward the date of the next revaluation from 2022 to 2021. 1 April 2019 marked the date for which rateable values will be based for the three year period between April 2021 and March 2024. This shorter gap between revaluations should be beneficial to most commercial occupiers and owners with rate liabilities responding to market changes more quickly. The Government has already announced that, for one year from 1 April 2020, the business rates retail discount for properties with a rateable value below £51,000 in England will increase from one third to 50%. In response to Covid-19, and to support small businesses, the retail discount will be increased to 100% and expanded to include hospitality and leisure businesses for 2021. In addition, the government previously committed to introducing a £1,000 business rates discount for pubs with a rateable value below £100,000 in England for one year from 1 April 2020. To further support pubs, in response to Covid-19, the discount for pubs will be increased to £5,000. The Treasury Committee published a report on the Impact of Business Rates on Business on 31 October 2019 which recommended the Government examine alternatives to the current system in time for the Spring Budget 2020. The report states that since Business Rates were introduced in their current form in 1990, the revenue they have generated has outpaced inflation. It goes on to state that the VOA informed them that as of March 2019, 16,000 appeals were made to the 2010 listing remained outstanding, years after they were first raised. The BBPA highlight the particularly unfair impact on pubs who pay 2.8% of the entire business rates bill despite accounting for just 0.5% of business turnover. The Government has responded to this report on business rates and is launching a fundamental review of business rates to report in the autumn. The objectives of this review are to; reduce the overall burden on businesses, improve the current business rates system and consider more fundamental changes in the medium to long term. The Government has announced that the corporation tax reduction will be maintained at 19% from 1 April 2020 to support vital public services and businesses with taxable profits. The scrapping of the beer duty escalator had a positive effect on the sector, which had seen an increased taxation burden with beer duty rising by 42% since March 2008. Sales of beer in 2019 were up 1.1% on 2018, an impressive statistic considering 2018 had resulted in the biggest year on year sales growth for beer in 45 years. The former Chancellor of the Exchequer decision to freeze the Beer Duty in the last budget, with effect from February 2019, certainly played a role in this growth in 2019. Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 12
The 2020 Budget has seen duty rates on beer, spirits, wine and cider frozen. Emma McClarkin, the Chief Executive of the BBPA
commented, ‘This freeze alone will save pub-goers £80m and secure 2,000 vital jobs across the Country’.
9.4 Beer Volumes
Beer volumes have been in decline in recent years as a result of changing consumer preferences and the availability of cheap
supermarket product.
The affordability of beer in supermarkets and off-licences has risen by 188% since 1987, according to a study by the Institute of
Alcohol Studies (IAS). By contrast prices in pubs have been steadily rising. According to the Good Pub Guide, the average price
of a pint of draught lager was £3.79 in pubs for 2019, up 44% on 2007. The volume of beer sold in supermarkets and off-licences
in the UK topped the volume sold in pubs, clubs and restaurants for the first time in 2014. Pubs’ beer sales in the second quarter
of 2019 were up 0.3 percentage points on the same period in 2018.
Operators were working hard to mitigate these challenges with the widening of their offer to draw income from craft beer and
spirits, which cannot be replicated at home, and food, including breakfast and coffee, and accommodation. Covid19 has however
compounded the decline in on sales and rise in off sales.
UK Beer Volumes MAT Q2 2019
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
On sales MAT Q2 2019 Off sales MAT Q2 2019
Source: BBPA
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 13The growing interest in craft beer is beginning to arrest the decline in beer volumes and is growing in importance within the sector.
This is available to the customer both in the pub and at home. The number of UK breweries is growing at 17% CAGR with the
number tripling in eight years. A large portion of this growth is led by tax breaks for small brewers against their larger competitors.
This trend is benefitting the pub and regional brewers in particular who are capitalising on this trend.
Sales of gin and other craft spirits has also increased considerably in recent years. In 2018, according to The Wine and Spirit
Trade Association (WTSA), sales within the spirit industry topped £11.1bn with 54 new distilleries opening in 2018. Gin sales in
particular were at £461m, almost three times the total in 2009. The WTSA report that the UK’s pubs, bars and restaurants saw
sales of gin pass £1bn for 2018, an increase of 56% on 2017. This has seen the ONS add gin to the basket of goods that are
monitored to measure inflation.
Total sales of Gin at home and abroad are now worth over £3.2bn with Britain sending more gin around the world than it does
beef, wheat or beer with gin sales worth 14% more than sales of British beer overseas, sales of British beer totalling £590 million
abroad in 2019.
UK Manufacturers’ Sales of Gin, 2008 to 2017
500
450
400
350
300
Sales £m
250
200
150
100
50
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
In a report produced by PUB19, a range of age groups were surveyed to provide data on the latest Pub trends with an eye from
the consumer. 91% of those surveyed chose the Gin and Tonic as their favourite tall drink reflecting the power of the trend. It was
said that dark rum is thought to be the next big thing in the spirit sector.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 14In addition the cocktail market has grown by 9.5% in one year with the Pornstar Martini overtaking Mojito to become the UK’s top cocktail. Cocktail drinkers visit the on trade 25% more than non-cocktail drinkers. The market continues to grow and in 2019 was valued at £587m. World Health Organisation data found that Britons are on average drinking less alcohol, with consumption falling from 12.6 litres of pure alcohol a year per adult in 1990 to 11.4 litres in 2017. The Wine and Spirit Trade Association has highlighted that the low- alcohol wine and beer market has increased 10-fold since 2009 and the wider non-alcoholic spirit alternatives are following suit. Consumers are increasingly moving away from alcoholic drinks with sales of non-alcoholic beer, wine and spirits at a record high in the UK. Peroni, Becks and Heineken are among the global brands looking to capitalise on this growing trend in low and non- alcoholic drinks by producing non-alcoholic beers. Heineken reported that they installed 3,000 “0.0” beer taps in 2018. 12.0 Public House Tenanted Occupational Market The tenanted pub sector has been impacted by legislation, most recently The Small Business, Enterprise and Employment Act 2015. There has been a considerable amount of commentary around The Code and what it means for the tenanted pub sector. When it was first announced many suggested it signalled the end of the tied model but this has not been the case. The current Pubs Code Adjudicator Paul Newby highlighted that “the point of the code is not to promote free-of-tie. It’s to offer tenants choice.” Since the introduction of The Code very few tenants have actually moved away from tied agreements in favour of Market Rent Option (MRO). Rather than leading to a decline in the tied model, the Pubs Code has acted as a catalyst for change. Pub Companies have had to improve their tied offering to show value for tenant as well as work on their relationship with their tenants. The new Pub Code Adjudicator, Fiona Dickie, will be appointed in May this year. The tenanted pub market has been resilient in the face of legislative changes and tough operational market conditions. An indicator of the strength of the tenanted pub market is the transaction activity that has occurred in the past two years. This includes TDR Capital acquiring Ei Group for £2.97Bn and CK Asset, a new entrant to the pub market, agreeing acquiring Greene King for approximately £4.6Bn. Another recent transaction is NewRiver Retail’s acquisition of Hawthorn Leisure in May 2018 for £106.8M reflecting a net yield of 13.60%. Of further note are the deals which occurred in the summer of 2017, reflecting two of the biggest ever deals in the tenanted pub sector. Patron Capital acquired Punch Taverns and then subsequently sold over 1,900 pubs to Star Pubs & Bars (Heineken UK). Following this in September, Proprium Capital Partners backed C&C Group’s £220M purchase of Admiral Taverns from Cerberus Capital Management. 10.1 Public House Tenanted Transactions There is currently significant interest in the tenanted public house sector from management teams as well as funds and private equity. This is evidenced by the level of activity in the market including large portfolio sales such as the Harvest Portfolio, Tokyo Portfolio and Swallow Portfolio as well as company acquisitions such as the Ei Group and Greene King Transactions. The Patron/Punch deal is an example of the kind of opportunities that are arising as the large pub companies look to consolidate and reduce the size of their estates. There will be opportunities for management teams to acquire portfolios of tenanted pubs and operate them more efficiently and with greater control. Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 15
Wadworth & Co sold 18 mainly freehold assets in the south and south west of England to Red Oak Taverns in August 2019. The
pubs are all tenanted and income producing, typically ‘locals’ and of relatively modest scale. The total income from the portfolio
was £673,610 of which £287,576 per annum was rent. On average the pubs, were let at £19,171 per annum, had a turnover of
139 composite barrels and an average wholesale profit of £200 per barrel. The price is subject to confidentiality but is believed
to be between £6.8 and £7m, representing a little over 10 times total income.
10.2 Portfolio Transactions
We include a timeline of major tenanted pub transactions below.
11
Patron Capital (Punch)
Caledonia Investment (Lib
10 Mitchells & Butlers Group)
(Orchid)
Red Oak (GRS)
9
Admiral Taverns (C&C)
Multiple of Estimated EBITDAR
8
Amber Taverns (L&G)
New River Retail (Punch)
7
Admiral Taverns
(Heineken) Aprirose (M&B)
6 Stellex (Chapman) NewRiver (Hawthorn)
Hawthorn (Greene King)
New River Retail
(Marstons)
5
Admiral Taverns (Nectar)
4
3
Aug-13 Mar-14 Sep-14 Apr-15 Oct-15 May-16 Nov-16 Jun-17 Dec-17 Jul-18 Feb-19
Transaction Date
Investors and management teams see a lot of value in the tied agreement, where management is more arm’s length. There is a
feeling, particularly among investors, that tenanted pubs look under-valued compared to the rest of the market. Further demand
for tied tenanted pub estates is coming from breweries who see this as a route to market and a method to off-set the impact of
the boom of craft breweries in recent times. The acquisition of tied pub estates provides improved distribution of their products.
C&C Group’s acquisition of Admiral Taverns is an example of this. Over the three years prior to their acquisition of Admiral C&C
Group had made overtures to Spirit Pub Company and Punch Taverns, although missing out on both occasions.
Transactions of individual tied tenanted investments are rare and where transactions are taking place, it is usually for bottom end
public houses that are usually sold for alternative use where the purchaser is keen to retain income whilst a change of use is
sought.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 16Most transactions of tied tenant public houses have been sold by way of portfolios. We highlight further detail of these deals below:
Date Vendor Purchaser Number Price Price per pub Analysis Comment
Bottom end wet-led community pubs
Dec-19 Bravo Inns NewRiver 44 £17.9M £400,000 c. 6.80x EBITDA predominantly located in North West
England
Marstons Admiral
Nov-19 137 £44.9M £325,000 c.10.68x EBITDA National portfolio
(Harvest) Taverns
Heineken Admiral
Sep-19 150 c.£55M Undisclosed c.7.30x EBITDA National lower end portfolio
(Tokyo) Taverns
Heineken
Dec-18 NewRiver 76 c.£12.00M Undisclosed c.6 EBITDA National bottom end portfolio
(Swallow)
May-18 Hawthorn NewRiver 298 £106.80M £333,333 7.35 EBITDA National portfolio
Average pub
Nov-17 Star Pubs G1 12 Undisclosed Undisclosed EBITDA £72,300 All situated in Scotland
pa
Average pub
Admiral
Nov-17 Star Pubs 17 Undisclosed Undisclosed EBITDA £72,300
Taverns
pa
Cerberus
Purchase of share capital of Admiral
Sep-17 Capital C&C Group 845 £220.00M £260,000 8.73 EBITDA
Taverns
Management
10.3 Pub Casualties
Despite the statistics from Campaign for Real Ale (CAMRA) regarding the number of pub closures per week, there have been
very few pub chains that have suffered to the same extent as restaurant businesses in the last 12 months.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 17Date of
Operator No. of Closed Units
Administration
Epic Pub Co September 2019 3 leasehold
Authentic Alehouses March 2019 7 freehold
Mitchells of Lancaster December 2018 15 pubs plus York Brewery
Bierkeller October 2018 5 leasehold
Kupp August 2018 4 leasehold
Park Properties
February 2017 16
(Dundee) Limited
Maclay January 2015 15
13.0 Covid-19 Impact
The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a “Global Pandemic” on the
11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries and market
conditions are clearly hampered at present. But even prior to this the market was indifferent both as a result of political uncertainty
(Brexit in particular), social trends, the competition from supermarkets retailing cheap alcohol, and branded restaurants offering
“eating out” deals and discounts. These factors have resulted in a large number of public houses / restaurants coming to the
market due to publicans and restaurateurs failing to make a viable living from their businesses.
We attach at Appendix 2 our latest Covid-19 Market Update Information Flyer, which expands on the above.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 1814.0 Comment on internal and external layout The Queens Head is a single room operation which in my opinion is too small to sustain a managed operation. This is where a company employs all staff as opposed to an owner occupier. On inspection of the pub in October 2020, the Property could accommodate 40 covers seated, accounting for social distancing measures. I would anticipate without social distancing measures, this may be increased by approximately 20%. I set out below the requirements for managed operators who are currently in the market for additional sites: • Site size of 0.5 to 1.5 acres. • Prominent ‘A’ road locations. • Sufficient car parking of between 60 and 100 car parking spaces. • 100 to 200 external covers. • 100 to 200 internal covers with optimal operation layout. Although the Property is situated in a prominent location just off the A414, it does not meet any of the requirements and given that the site extends to 0.11 acres there is limited scope to increase the size of the Property. In light of this I consider that the Property is likely to only be of interest to individual operators. 15.0 Condition On inspection the Property was in fair internal condition, although the external frontage requires some refurbishment in order to appeal to the modern customer. No structural repair issues were evident on inspection and I have assumed the Property is structurally sound. I note however an ingoing operator would be mindful of the need for immediate capital investment associated with any repair issues or structural defects should these arise. I have given consideration to the level of capital investment required to get the property into a condition in which it could attempt to trade competitively and maintain a sustainable level of trade. I have estimated a figure of £365,118 calculated by applying the Building Cost Information Service (BCIS) rehabilitation / fitting out cost per sq m for public houses in the immediate area (see Appendix 3) to the Gross Internal Area to the ground floor of the Property of which have been provided by architect plans (£1,775 per sq m x 205.7 sq m). I note that this cost is exclusive of any costs to refurbish to the exterior of the Property which currently is unattractive and we consider would deter modern customers. I have not attempted to calculate these costs however consider that an ingoing operator would be mindful of the works required. We have also have not included the installation costs of commercial equipment in the Property given there is no kitchen, however, an ingoing operator may want to replace the existing equipment and fixtures and fittings within the pub. I have therefore outlined below some of the likely start-up costs an operator would consider: Beer Line / Font installation £1,750 EPOS Till System £800 Furniture £10,000 (Tables, chairs and equipment) Refrigeration for bar £850 Glasswasher for bar £750 Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 19
Glassware £350 Bric-a-brac £500 Two Weeks Stock £1,900 Working capital, say £3,000 TOTAL £19,900 In addition, statutory compliance checks are required prior to re-opening the business and an allowance for new appliances is likely to be required. The cost of these is likely to be as follows: 5yrly Electrical - Depends on how many circuits (approx. £12.00 per circuit) – say £300 Gas Safe - £300 Fire Risk Assessment – £650 Emergency Lighting - £300 Fire Alarm Testing - £300 TOTAL £1,850 The total cost to undertake the compliance checks is therefore in the region of £1,850 and other reports may be needed, for example an asbestos report. I therefore estimate a total capital cost required for the Property to trade competitively and maintain a sustainable level of trade, exclusive of repairs or major structural works, to be in the region of £386,868. 16.0 My Opinion of Trade The Queens Head is currently closed under current Government guidelines. For the reasons stated above, in light of Covid-19, I am of the opinion that in the short term the business is unviable. I have next considered the viability of The Queens Head post refurbishment and its long term viability, by considering the likely sustainable trade which could now be generated and, thereafter, carrying out a hypothetical profit and loss exercise assuming average costs of running the business. The exercise involves assessing the level of trade that a Reasonably Efficient Operator (REO) would expect to achieve on the assumption that the Property is properly equipped, repaired, maintained and decorated. This trade is known as the Fair Maintainable Turnover (FMT). The purchase costs of the sales are deducted from the FMT to arrive at the gross profit and thereafter all the costs expected in running the business including wages, repairs, utility bills and rates are deducted to arrive at a Fair Maintainable Operating Profit (FMOP). This profit is stated prior to depreciation and finance costs (relating to the asset itself) and is the profit that the REO would expect to derive from the FMT based on an assessment of the market’s perception of the potential earnings at the Property. I have used my review of the barrelage information and my extensive knowledge of the pub industry, to estimate the trade which would be achievable by a REO. The business in its location would sell drink to local customers but would not generally attract those from outside the immediate area. Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 20
We have assumed that a business of this type once refurbished would generate approximately 200 brewer barrels in line with
historic figures and comparable businesses that we have advised on in the region. I have assumed total wet sales (no dry sales
due to no kitchen) of £4,078 per week, based on an annual barrelage of 200 brewer barrels and an average cost per pint for
Hertfordshire of £3.97 (£3.97 per pint x 200 barrels x 288 pints /1.2 VAT = £190,560).
This results in a total annual turnover of £212,060 when including income from wine, spirits, minerals, food/sundries and an AWP
machine. In my opinion, this is reflective of the trade that the REO could achieve after the property has been fully refurbished.
I would expect a gross profit, if operated on a free of tie basis, of approximately £127,832 per annum (60.28% of FMT across the
wet sales). The gross profit is defined as the sales turnover less the costs of purchase (i.e. beverage products) and is therefore
stated prior to the running costs of the business such as wages, utilities, repairs and return on capital being deducted. In addition
as a small private operator, wholesalers may add delivery charges. Depending on the sale mix I am of the opinion that it is
reasonable to assume that an overall gross profit margin of around 60% is reasonable to achieve given trade is 100% wet led.
I have allowed a total wage bill of approximately £60,000 per annum which equates to approximately 28.29% of turnover, which
is high but reflective of the low turnover of the business. This is calculated based upon two persons earning the living wage, with
additional support during busy times and opening the business from 5 pm during the weekday, which is typical for a local
community public house with limited daytime trade. It is likely that further staff would be required in excess of this assessment.
As the trade is relatively low, the general costs in running the business would be high as a percentage of turnover as there is a
minimum cost of running a business irrespective of the level of trade. I have adopted average figures for fuel costs, repairs,
insurance and other items of which I am familiar through my involvement with other businesses. I have estimated the likely
business rates bill from the 2017 Rateable Value. I would expect the total costs inclusive of wage costs to amount to around
£111,510 per annum generating a profit of £16,322 even before any rent (under a free of tie tenanted model, a market rent would
be charged which would normally reflect between 8 and 12% of turnover). If we deduct a market rent then the pub would be loss
making.
This clearly does not allow the operator to have a sufficient reward for his efforts. A profit margin of 7.7% of net turnover before
rent or interest payments is below industry benchmarks of typically 20 to 25% of turnover and no pub operator is likely to invest
over £380,000 for this level of return. A summary of my trade assessment is shown in the table below:
Description
Wet (£) 190,560
Dry (£) n/a
Machines (£) 2,500
Fair Maintainable Turnover (FMT) (£) 212,060
Gross Profit (£) 127,832
Gross Margin (%) 60.28
Wages (£) 60,000
Wages/FMT (%) 28.29
Other Costs (£) 51,510
Other Costs/FMT (%) 24.29
Total Costs (£) 111,510
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 21Total Costs/FMT (%) 52.58
Fair Maintainable Operating Profit (FMOP) (£) 16,322
FMOP % 7.70
17.0 Alternative Provision
I have given consideration to the competition surrounding the Queens Head. There is currently a total of 36 pubs in a five mile
radius of the Property. I set out below the alternative public house options that are available to the local community in the
immediate area, with six competing businesses identified.
Property Freeholder Comments
Steam Coach , 86 St John's Rd, Hemel
Hempstead HP1 1NP
Tenanted house with large food offering. Situated 0.5 miles to the
Greene King west of the subject Property and occupies a prominent roadside plot
fronting Boxmoor Common.
Three Blackbirds, 194 St John's Rd,
Boxmoor, Hemel Hempstead HP1 1NR
Managed house with large food offering. Situated 0.7 miles to the
west of the subject Property and occupies a prominent roadside plot
fronting Boxmoor Common.
Greene King
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 22Property Freeholder Comments
Full House, 128 Marlowes, Hemel
Hempstead HP1 1EZ
Town centre managed house with large food offering. Situated 0.7
JD
miles to the north of the subject Property and occupies a prominent
Wetherspoon
town centre plot amongst many other food and beverage operators.
Post Office Arms, 46 Puller Rd, Hemel
Hempstead HP1 1QN
Tenanted pub, over 150 years old. Serving traditional ales and
Fuller Smith &
provides a good food offering, with a separate sports bar inside.
Turner PLC
Situated 1 mile from the subject Property.
The Mallard Harvester, 507 London Rd,
Hemel Hempstead HP3 9BQ
Mitchells & Managed pub with an extensive food offering. Situated 0.9 miles to
Butlers Retail the west of the subject Property and adjacent to Hemel Hempstead
Limited train station. Large car park to the front elevation.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 23Property Freeholder Comments
Fishery Inn, 2 Fishery Rd, Hemel
Hempstead HP1 1NA
Mitchell & Tenanted pub with extensive food offering. Traditional pub in
Butlers Retail character and occupies a scenic riverside plot with a large car park.
Limited Situated 1.1 miles to the west of the subject Property.
Market Arms Tavern, 4 Waterhouse St,
Hemel Hempstead HP1 1ET
Freehouse with a good food offering. Previously a nightclub, the
Northridge
property was converted into a town centre public house in 2018.
Cars Limited
Situated 0.9 miles north of the subject Property.
The immediate area surrounding the property is residential and whilst the pub is situated on a roadside position it is limited in
respect to overall footfall and relies on regulars for custom. The majority of the competition set out above are located closer to
Hemel Hempstead town centre or towards Boxnoor. As a result, the competition detailed above is situated in more prominent
positions than the subject property as well as the majority offering car parking, which presents them better as destination pubs.
The competition offers larger and better equipped facilities currently offered by The Queens Head, with all of those noted above
providing a food offering. I do not consider that the Queens Head would attract any additional trade, even if refurbished, and would
struggle to compete with the surrounding competition.
We have seen considerable lifestyle changes taking place over the last six years which have made premises such as The Queens
Head become unviable and the highly competitive nature of some of the managed house pub chains and casual dining restaurants,
which have made it even more difficult to profit from this type of operation.
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 2418.0 Conclusion After a review of the historic trade, and in light of the Covid-19 pandemic, I am of the opinion in the short term the Property is unviable. The Property relies heavily on trade from ‘local regulars’ and without a food offering, the business will fall short to its nearby ‘destination’ pub competitors. After undertaking a hypothetical profit and loss account for a free-of-tie model the Property and considering the level of return against the capital costs required to achieve and sustain this return, I am of the opinion that the Property is also not viable in the long term. I consider that even with substantial investment, in the region of circa £385,000, to improve the condition and presentation of the Property, reflective of the existing choice in the immediate area, this would not attract any additional trade. Many public houses have historically operated at low levels of sales and profitability, perhaps enough to provide an income at an equivalent minimum wage or lifestyle. However, the significant capital required to be invested would still, in my opinion, result in very low profit levels or negative returns, and a prudent investor would obtain far better returns elsewhere without the risk that attaches itself to a public house business. In my opinion an operator would perceive the chance of making any profit too risky against the capital investment required for the freehold. I am therefore of the opinion that a lender would also consider this a risky business to lend a commercial mortgage against. An individual operator is unlikely to have substantial cash reserves and if they did this would be an unwise business venture to place their capital. Given the strength of the competition from multiple and individual operators in better locations nearby, I have serious doubts if this operation in this location would survive. There have been considerable lifestyle changes over the past few years, and more to come, which have made premises such as the Queens Head unviable. Fewer people frequent pubs regularly given the opportunities for in home entertainment or when they do venture to pubs would go to larger managed houses for their extensive food offering and spacious family friendly environments. From my inspection of the Property, and reviewing all documentation, the business appears not to be capable of delivering a reasonable annual profit and would not attract operators looking to rent or buy the Property. Based on the above I am of the opinion that the Property is unlikely to be commercially viable now and in the longer term. Adam Bullas MRICS Date: 27 January 2021 Director Disclaimer The projections outlined within this report are assuming a good average operator running the business efficiently. Savills would have no involvement in the running of the business and therefore cannot be held liable for the projections not being obtained. Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 25
Appendices Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 26
Appendix 1 Photographs Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 27
Front Elevation Front and Side Elevation
Trading Area Trading Area
Cellar Beer Garden
Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL
Client: Cordage 30 Limited February 2021 28Appendix 2 Covid-19 Market Update Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 29
2.1 Pre-Covid Pub Market In considering the value of the property held, it is important to set the current market in context with the strong market conditions prior to Covid-19. The pub market had proven to be resilient with positive consumer spending, set against the wider consumer market. The macro-economic influences on the sector were positive and this was reflected in trading results and market activity. People had begun to recognise the need for social interaction focussing their spending on experiences rather than material goods and the interest in craft beer and cocktails was growing. As a result the consumer was visiting the pub more and in January this year the Office for National Statistics (ONS) reported that for the period between 2018 and 2019 pub and bar numbers had increased by 0.8% to 39.130. In the same month, Barclaycard reported that consumer spending in pubs grew by 10.1% set against overall general expenditure growth of 3.9%. This resulted in improved profitability, which encouraged increased investment by operators driven by positive returns on capital employed. This, in turn, captured the interest of real estate investors seeking return in a low interest environment attracted to the sector by its by freehold property base. The strength of the pre Covid-19 pub market was reflected in the acquisitions of two of the biggest pub companies in the UK. TDR Capital, the private equity firm that owns Stonegate Pub Co., acquired Ei Group in a deal which was agreed in September 2019 and completed March 2020 and valued the group at an enterprise value of £2.97bn. Ei Group owns an estate of approximately 4,400 predominantly tenanted pubs, along with some managed and commercially let properties. The purchase reflected a multiplier of EBITDA of 11.40x and equated to a price per pub of circa £720,000. In addition, CK Asset Holdings Ltd , the Hong Kong based real estate investor, acquired Greene King Plc in August 2019 for a reported price of £4.6bn. Greene King holds a mix of managed and tenanted properties totalling approximately 2,700 pubs, restaurants and hotels. 2.2 The Post-Covid Environment Covid-19 has had a significant impact across the globe and pubs have not been immune. The start of 2021 has brought the third national lockdown since the first case of Covid-19 was confirmed in the UK on 31 January 2020 and it is anticipated pubs will be unlikely to reopen again until early March. The timeline below shows the series of events since the first mandated closure of pubs on 20 March 2020. Property: Queens Head, 34 Lawn Lane, Hemel Hempstead, HP3 9HL Client: Cordage 30 Limited February 2021 30
You can also read
